Jeff Gelles from The Philadelphia Inquirer wrote a great article titled Consumer 10.0: How the Pew Trusts aided credit card reform in which he talks about a couple of former credit card insiders that banded together to push for credit card reform.
If you are interested in this kind of stuff you’ll find the article fascinating. Here are some excerpts.
It was early 2007, and Michael Roster and Dwane Krumme each viewed the credit card industry with growing dismay.
Each had played a role in its development – Krumme as a banker, and Roster as a prominent industry lawyer. Now, each saw that the business had turned into a trap for unwary consumers dragged down by billions of dollars in tricky fees and sky-high penalty interest rates. Each worried, as Krumme recalls, that lenders’ practices “could get a lot of people in trouble and hurt the economy as well.”
Krumme had been in banking since the 1960s and handling cards since the mid-1970s – a time when lending decisions were still made by people, not computers. In the mid-1980s, he was a pioneer in adapting what’s now known as FICO credit scoring to general-purpose credit cards.
Now 67 and semiretired in Sun River, Ore., Krumme had watched with mixed feelings, and then a growing distaste, as the industry evolved.
Credit scoring and so-called risk-based-pricing models added fairness and objectivity to lending, he says. But they also eventually became tools to predict just how much money could be squeezed from financially stressed or errant consumers.
Krumme says over-limit fees are a good example of how banks set fees to generate cash while claiming they were controlling risk. “If there’s that much risk, why don’t you just decline the transaction rather than charge a fee?”
Long credit card contracts served a similar function. Some customers never got in trouble. But others found they faced a penalty rate, perhaps 25 percent or higher, “if you were an hour late with a payment,” he says.
“To me, that was simply managing revenues, not managing risk,” Krumme says. “Particularly since the late ’90s, my view was that the industry just became greedy – that’s the bottom line.”
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